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Grid constraint: options for project development

GRID CONSTRAINT: OPTIONS FOR PROJECT DEVELOPMENT 2 32141581v2 What’s the Problem? Constrained grid is an issue that impacts many new renewables developments. A quick look at the distribution heat maps published by SHEPD and SPEN presents a primarily crimson picture and that’s before you’ve checked the corresponding transmission capacity. And it isn’t just a Scottish problem. There are other grid constrained areas across the UK, most notably in the South West. Unless you can build a project close to a major centre of population (or perhaps on a recently closed coal plant), obtaining a grid connection will likely require significant and expensive grid reinforcement work and there may be a long wait to get connected. As most renewables projects are located where they will generate the most electricity, they tend to be remote from population centres. How did we get here? Quite simply, our electricity transmission and distribution systems were designed to meet a particular supply and demand picture which no longer reflects the current reality. Until relatively recently, the flow of electricity across the system was in one direction from large centralised power stations to individual users and consumers. Our electricity infrastructure is designed to deal with that, with transmission cables taking power from large power stations and to various distribution points to eventually supply electricity users. The growth of renewables and the corresponding increase in distributed generation has changed the location of generators and led to more bi-directional flows on the grid. The electricity grid system is also designed to cope with extremes: to keep the lights on at times of peak demand; and to stop the cables melting when supply outstrips demand. This design principle generally prevents additional connection to the grid ahead of necessary upgrade works. 3 32141581v2 What’s the Solution? Long term there are a wide range of potential solutions to develop our electricity infrastructure to better meet the demands of 21st century life. Technological innovation is already increasing the available capacity of the current network and will lead to step changes in the flexibility of demand side measures for managing the grid. Significant large scale investment in extra cables and interconnectors will also improve capacity and allow the system to cater for renewables at the opposite end of the country from demand. Regulatory changes such as improvements in queue management and a move towards distribution system operators could also facilitate more grid access for projects by giving distribution owners more flexibility to balance their networks. Unfortunately, these measures aren’t going to help so called shovel ready projects so what are the options for projects at the front of the pipeline? Possible solutions include: • Install a private wire connection to nearby demand or generally to provide a local supply. • Share a grid connection with a neighbouring project • Sign up for a grid connection subject to active network management. • Install storage alongside a project. The next sections will explain each of these in more detail and consider the advantages and disadvantages for each. Some options may be more suited to particular technologies or particular locations and it may be possible to combine options to achieve the optimum solution. Private Wire Connection What is it? A private wire connection involves installing a privately owned cable to connect the generating station directly to a source of demand e.g. a local business. The demand could be a single user or a range of users as 4 32141581v2 part of a local supply network. Depending on the level of demand, a private wire could take all or part of a project’s export. It can therefore reduce the necessary grid connection capacity or avoid the need to connect to the distribution network altogether. Advantages, disadvantages and things to think about • Construction of a private wire can be (but not always) cheaper than securing a grid connection to the distribution or transmission network. • The project needs to be located close enough to the demand which makes it unrealistic for large and very remote projects. • The provision of a local supply to various users could require a licence under the Electricity Act 1989. There are exemptions to the licence requirement applicable for small suppliers (below 5MW or 2.5MW for domestic consumers) and for supplies to onsite or remote consumers using private wires. It may also be possible to use the “Licence Lite” regime to make a wider supply to consumers if you partner with a licenced supplier. It is also worth bearing in mind that if you create a private distribution network, you may need to allow third party suppliers access to consumers on that network to comply with competition regulations. • To support investment in the generating station, the demand needs to be from a creditworthy entity with a long term need (or capable of being substituted easily). This will be an essential requirement to secure project finance from a bank. As the private demand is effectively replacing the PPA element of the project’s revenue stream, a CfD wouldn’t remove this credit risk. • A local purchaser may be willing to offer a better price for electricity than under a standard market based PPA as the comparative pricing will be retail rather than wholesale. The private wire arrangement avoids use of system charges and permits the generator and purchaser to agree a price somewhere between the whole price and the retail price, usually a benefit to both. • Unless the demand is constant enough to take all power from the generating station then a back-up ‘spill’ grid connection will be required to allow maximum export. 5 32141581v2 Shared Grid What is it? As the heading suggests, this involves sharing a grid connection with one or more neighbouring projects. This can take a number of forms. Examples include: • An existing project with spare, unused capacity on its grid connection grants a third party generator access to that connection. • A group of developers of new generating stations agree to establish a private network and secure a single grid connection to which all generators have access. • A group of developers of new generating stations establish a grid co company to establish a private network and secure a single grid connection which they can all access via the private network - the grid co can sell all power on behalf of the generators. All of these options can be deployed on the basis of a private wire or distribution network connection. Advantages, disadvantages and things to think about • Grid sharing arrangements, in all forms, generally reduce the grid connection costs for a project by sharing the costs and the infrastructure between multiple schemes. • The most straightforward approach might be to take access via another generator’s connection. However the generator accessing the connection has little or no control over the ultimate connection to the grid and, if the primary connection is disconnected there is often no right to require the DNO to allow the accessing generator to take over the connection. It means the accessing generator is taking insolvency risk on the generator holding the gird connection and investors may not agree to fund projects structured in this way. • Structured grid sharing arrangements using a grid co can be more complex but they can provide some additional protection and control for generators. All sharing generators can be given rights in the ownership and control over the grid co and the default of other generators participating in the grid share 6 32141581v2 can be managed. In effect, if one party breaches the grid connection, the other generators can take control of the grid co, remedy the breach, and prevent the loss of the grid connection. It is important though that grid co is established on an insolvency remote basis. • Grid sharing between technologies can be complicated especially where one project is already operating and therefore existing generators should make sure they understand the technical consequences of grid sharing for their own project before proceeding. Active Network Management What is it? The term Active Network Management or ANM can have several meanings but here we are referring to a system that curtails or completely prevents export from a generating station based on the real time capacity of the relevant grid network. Most ANM systems operate in respect of a particular section of constrained grid. The rules of each ANM system will determine which generating stations can export at any particular time. A simple ANM system might operate on the basis of a “last in first off” mechanism to determine export priority. Usually this means each of the generators participating in the ANM system would be ranked in order of their place in the grid connection queue. If available capacity on the relevant network is reduced e.g. due to reduced load or increased generation on that network export from generating stations would be progressively curtailed to zero, in queue order, until export is balanced with network capacity. Likewise if capacity increases, curtailed generators would be allowed to increase export in reverse order. Generally, a loss of communication with a generating station would trip all export from the relevant generating station. A failure of the ANM control system would prevent export from all generators. Advantages, disadvantages and things to think about • Often connecting to the network via an ANM system defers grid upgrade works and can therefore be a cost effective and quick way to connect to the grid. 7 32141581v2 • Curtailment figures provided by the operators of ANM systems (generally DNOs) are indicative only. If curtailment figures are much higher than anticipated this may impact a project’s ability to repay investment and lenders are likely to take a conservative view of curtailment estimates. • Generators at the back of the queue may find that they have only very limited opportunity to export. Understanding the capacity and nature of the projects ahead of you in the queue is very important as is analysing potential future changes on the network e.g. closure of large plant or proposed new developments. • ANM may work together well with a storage solution such that electricity could be stored at times of network constraint and exported when demand increases. Storage What is it? (And why it is relevant to grid constraints?) Storage comes in a vast array of forms and a description of the various technical solutions is one for the engineers. Generally, we are referring here to some form of storage (e.g. a battery) located before the export meter for the generating station. The storage plant will store electricity generated by the generating station to enable the generator to control the timing of export to the grid It is therefore possible for a generating plant of a given capacity to export the same total volume of electricity through a smaller connection capacity. Advantages, disadvantages and things to think about • By potentially reducing the peak export requirement of a generating station, the addition of storage plant to a generating station could reduce grid reinforcement costs and therefore grid connection charges. • Storage could be used to manage export in an ANM system by allowing generation to be stored during times of constraint and exported when capacity increases thus improving the overall revenues available to ANM generators by reducing the overall level of curtailment. • Implementing a storage option adds cost to a project. In order to justify the additional investment, that cost would likely need to be repaid by the revenue benefits or saved grid costs associated with the storage system which would need to be identified and modelled. 8 32141581v2 • The use of new storage technologies may impact the appetite of investors for a project if the particular storage technology is relatively unproven. • There is a risk that the inclusion of storage plant, depending on the nature of the plant, could impact eligibility for renewables subsidy and this should be assessed when considering options during project development. What next? In summary, there is no ‘one size fits all’ solution to grid constraint but there are a range of options. Developers will constrained grid sites should consider the full range of options described above and how those could fit with the location, capacity, technology and economics of their particular project. There are pros and cons with each option but properly considering the options at the outset can allow solutions to be fully built in to the project structure and the risks mitigated as far as possible. If you have any questions or would like to discuss this topic further please get in touch with Keith Patterson, Sarah-Jane McArthur or your usual Brodies contact. Keith Patterson CO-HEAD OF RENEWABLE ENERGY +44 (0)131 656 0059 keith.patterson@brodies.com Sarah-Jane McArthur MANAGING ASSOCIATE +44 (0)141 245 6276 sarah-jane.mcarthur@brodies.com